Nigeria | The Inflation Conundrum …

 LAGOS, Nigeria, Capital Markets in Africa — The inflation figure for the month of February was recently released by the National Bureau of Statistics. As much as the increase was largely anticipated, the huge gallop to 11.4% came as a surprise as consensus had capped the rise at 10%YoY. The increase in the headline figure was attributed to faster increases in prices across all major divisions except Restaurant and Hotels division. The Food and Core sub-indexes which make up the CPI, increased by 11.3% (+0.71% MoM) and 11.0% (+2.2% MoM) as prices of all major food groups and imported items increased. In other words, prices of all items including basic necessities increased rapidly over the period. For example, the widely consumed Indomie Noodles which sold for N30 for a 70g pack two months back now sells for N40.

Since the devaluation of the Naira in 2014, inflation has been inching higher reflective of the pass through effects of the stronger dollar against the Naira – cost-push inflation. The latest upsurge was largely spurred by the rapid deterioration of the value of the Naira in the parallel market. FX illiquidity in the country has led to an indirect FX rationing by the CBN as “essential” goods are given priority to access dollars at the official rate. This has driven demand to the parallel market and speculative activity. At its peak, the USD/NGN rate reached $1/N400. In addition, other inputs of production continue to rise. Electricity tariffs were hiked by as much as 45% last month while fuel prices increased month on month in some states as the scarcity crept in.

With the inflation number breaching the MPC mandate of price stability at single digits, the genie is out of the bottle. Given the recent expansionary policy and the stagnation of the economy (GDP of 2.1%), price stability might not be a major priority. This is more glaring as the CBN remains resolute on not devaluing the currency. The general rise in prices of goods and services force consumers to purchase only the necessities while cheaper discretionary items are preferred. Businesses face higher running costs and most are caught between passing expenses to price sensitive consumers and aggressive cost management which often include slashing overheads.

Given the recent economic readouts, the country is technically in a state of stagflation. We expect inflation to remain double digits this year as capital controls and the volatility in the exchange rate remains. It will be interesting to see what the MPC decision will be as they meet today and tomorrow (March 21-22) on the state of the economy. Chances are the status quo will remain. Not what the country needs right now.

Source: Primera Africa Investment Research (Weekly Note)

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